How to manage a work-in-progress project from a financial perspective
If your business is regularly hired to complete lengthy projects for clients that you don’t bill for until the project’s completion, you’re likely finding that you’re suffering from large gaps in cash flow. This can be particularly problematic when you’re trying to manage your fixed expenses, or if you’re paying employees or contractors to help you complete the project.
How then can you effectively manage your work-in-progress projects from a financial perspective, so that you’re not falling behind on your bills? Here are two key strategies we recommend.
Two ways to financially manage your work-in-progress projects
- Progress billing: The best way to make sure that your cash continues to flow is to introduce progress billing. This means that you will regularly issue invoices for the work you’ve completed to date, ideally once per quarter, rather than waiting to receive all of your revenue when you complete the project. (If you’re completing consistent work for a client on a monthly basis, you might even want to consider switching to a retainer fee instead.) Remember that when you create these invoices, always include as much detail as possible about the work you’ve completed, so that your client understands exactly what they’re paying for.
- Deployment fee: Another option for tightening your cash flow gap is to institute a deployment fee for all major projects to help you cover your upfront costs – typically this is approximately 25% of the total project fee. While this method may not keep your cash flowing as consistently as it would with progress billing, it’s still a helpful option so that you’re not paying out-of-pocket for your initial costs.
One of the biggest challenges you’ll likely face when switching to one of these methods is to convince your client to change their payment practice. Clients generally don’t want to pay until they have a deliverable, but that’s a mindset that you need to work around. We recommend selling it by explaining that these methods will help manage their cash flow as well as yours. By paying you a deployment fee or in installments, your client won’t be stuck with a huge bill upon the project’s completion.
Are you suffering from other cash flow problems? In our next blog post, we’ll cover some of the most common cash flow issues and help you figure out how to fix them.